“Cancellation of K-Dow could compromise Dow’s ability to close its pending acquisition of Rohm and Haas, a key element of Dow’s strategic plan, although neither that deal nor related financing is contingent upon closing of K-Dow,” said Bank of America analyst Kevin McCarthy in a research note.

Without the cash from the K-Dow deal, Dow would be highly leveraged if it were to complete its acquisition of Rohm and Haas, noted McCarthy.

If Dow completed the Rohm and Haas deal on its original terms, the company would have net debt of up to $29.6bn, representing a leverage ratio of 4.5x estimated 2009 earnings before interest, tax, depreciation and amortization (EBITDA), McCarthy projected.

The merger arbitrage spread on Rohm and Haas has widened to $27.81, or 55.4%, indicating growing scepticism among investors that the deal will go through on the original terms, if at all.

The K-Dow collapse prompted Standard & Poor's (S&P) to pull down Dow's corporate credit and senior unsecured ratings from A-minus to BBB while its long-term ratings remained on S&P's CreditWatch with "negative implications".

"This decision was unexpected given Dow's recent confidence that it would close the transaction, and is a significant development from both a strategic and financial profile standpoint," said Standard & Poor's credit analyst Kyle Loughlin.

S&P also downgraded Rohm and Haas' long-term ratings from developing to negative.

Dow's stock price finished on Monday at $15.32/share, down $3.60 or 19%. Rohm and Haas' share price fell 16% to $53.34/share on the New York Stock Exchange.

"Dow should be looking to protect its shareholders by cutting the Rohm and Haas deal at a lower price or walking away from the deal by paying a break up fee," said PJ Juvekar of Citi Investment Research.

"If Dow is forced to pay the original price of $78/share, then we will have to re-evaluate our thesis on Dow," Juvekar said in a research note.

The collapse of the deal “shows that North American ethylene assets are less attractive to Middle East buyers," said Juvekar.

If the deal were called off, Rohm and Haas’ stock would likely decline much further. Just about every chemical stock has fallen significantly since Dow announced the Rohm and Haas acquisition in July, when the latter company was trading at $44.83/share.

Dow previously indicated it has a committed $13bn bridge loan to complete the Rohm and Haas deal, noted Buckingham Research analyst John Roberts in a research note.

Additional funding is committed from investment group Berkshire Hathaway ($3bn) and the Kuwait Investment Authority ($1bn), which is separate from the K-Dow deal, he added.